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Supply chaos clouds European gas outlook

Europe may be pushing to diversify gas imports, but two surprise supply shocks have put the sector on edge

Disruption to European gas supply following the explosion at Austria's Baumgarten gas hub on 12 December, along with the shutdown of the Fortes Pipeline System (FPS) supplying oil and gas to the UK from North Sea fields, have highlighted energy security concerns on a continent where gas demand is on the rise.

The Baumgarten explosion, which hub operator Gas Austria Connect has said could be related to a technical fault in the filter system, knocked out a critical nexus for trans-European supply to several countries, including Italy, Germany, Croatia, Hungary and Slovenia. It sent gas and electricity prices soaring in the immediate aftermath of the incident. In Italy, which was worst affected, the government declared a state of emergency, as the power price more than tripled at one point.

While supply to Italy and other countries has been restored, and gas prices have eased in response, the incident is a reminder that increasingly interconnected power markets can create fresh problems. That's even as they aim to solve othersin this case, by making it easier to bring gas from the north, much of it Russian, towards southern Europe.

Despite outages on such a scale being relatively rare, the explosion has raised concerns over the safety of natural gas. It will be used by those keen to reduce Europe's dependence on the fuel to support their argument. Protests in Italy have already intensified since the explosion over the potential environmental impact of the planned Trans-Adriatic Pipeline (Tap), a crucial leg in the southern gas corridor route to take gas from the Caspian region to southern Italy for shipment on to the rest of Europe after 2020some 10bn cubic metres a year.

The counter-argument is easy to make. Europe needs gas for the foreseeable future and Tap would diversify gas supply, reducing the impact of a future Baumgarten-type incident, not least in Italy.

But the shockwaves created by this week's supply disruption may already be having a tangible effect on planning for Tap. On the day of the explosion, the European Investment Bank said it was deferring a decision on whether to sign off on a €1.5bn loan to support Tapthis would be the EIB's largest ever loanuntil February, saying it needed more time to assess the pros and cons.

The EIB had been expected in some quarters to approve the loan imminently, but has been lobbied not to support the pipeline by climate campaigners quick to point out that this week marked the second anniversary of the Paris climate-change agreement intended to staunch fossil fuel use. The Baumgarten explosion added an extra layer of uncertainty to the situation, and, according to sources cited by Reuters, also weighed on thinking behind the decision's postponement.

UK's Fortes supply pinch

The perils of dependence on bottlenecked energy-supply routes was also highlighted by the shutdown of the Fortes Pipeline System, which brings crucial oil and gas supply from some North Sea fields to the UK mainland near Aberdeen. FPS owner Ineos, which recently acquired the FPS from BP, has said repairs to a hairline crack found in the pipeline, which prompted the closure, could take some time.

At this stage, it is still too early to say how long the repair will take to complete, but it is expected to be a matter of weeks rather than days," Ineos said in a 14 December.

News of the shutdown helped lift Brent's price by more than 1% on 11 December, to around $65 a barrel, its highest level in more than two years, while the price of gas for immediate delivery in the UK surged by nearly 30%, to more than 66p per therm, as buyers scurried to find alternative supply during a period of cold weather.

The FPS carries liquids production from around 85 fields in the central and northern UK North Sea, as well as several Norwegian fields, on behalf of 21 companies, according to Ineos. In 2016, the pipeline system handled an average of 445,000 barrels a day of oil and some 3,500 tonnes a day of raw gas.

The dramatic impact on the gas price underlines concerns over UK energy security, given the country is now heavily dependent on imports, as UK North Sea production dwindles. It also rekindles debate over whether the closure of the ageing Rough gas storage facility, announced by owner Centrica last June on safety grounds, will put the UK energy system under too much strain.

Rough, located off eastern England, holds 185bn cubic feet of cushion gas and around 118bn cf of storage capacity, according to Centrica. It accounts for around 70% of UK gas storage and can supply around a tenth of winter peak day demand. The closure requires consent from the UK's Competition and Markets Authority (CMA) and the Oil and Gas Authority. The CMA said on 13 December, that its review had satisfied the body that Rough was no longer viable.

The loss of Rough will require UK wholesale gas buyers to be even more fleet of foot in finding alternative supply than they are already. The FPS shutdown prompted a rapid re-routing of the first commercial liquefied natural gas shipment from Novatel's Yamal LNG plant in Russia from its original destination in Asia to the UK's Isle of Grain terminal near London, as rising UK gas prices beat those on offer in Asia.